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Trust, but Verify: MD&A Language and the Role of Trust in Corporate Culture

Author

Listed:
  • Robert Audi

    (University of Notre Dame)

  • Tim Loughran

    (University of Notre Dame)

  • Bill McDonald

    (University of Notre Dame)

Abstract

Trust is both ethically important and essential for business but difficult to measure. This paper contributes toward clarifying the nature of trust in a way that is both conceptually helpful for ethical inquiries concerning business and pertinent to the measurement of trust as an element in organizations. Several papers hypothesize that increasing the role of trust in a corporation reduces the need for external monitoring and contracts. Assessing this important hypothesis requires a way to gauge whether a firm has a trusting corporate culture. We develop an objective measure of trust in a firm’s corporate culture by counting the number of times 21 trust-related words appear in an important kind of document: the Management Discussion and Analysis section of the annual report. We report two significant findings: that, contrary to what one might think, firms with a trusting culture frequently use audit and control-type words and that trust is positively linked with subsequent share price volatility. We propose explanations of these findings with the hope of facilitating the objective measurement of trust and enhancement of a trusting atmosphere in corporate culture.

Suggested Citation

  • Robert Audi & Tim Loughran & Bill McDonald, 2016. "Trust, but Verify: MD&A Language and the Role of Trust in Corporate Culture," Journal of Business Ethics, Springer, vol. 139(3), pages 551-561, December.
    • Handle: RePEc:kap:jbuset:v:139:y:2016:i:3:d:10.1007_s10551-015-2659-4
    DOI: 10.1007/s10551-015-2659-4
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    References listed on IDEAS

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    1. Margaret Forster & Tim Loughran & Bill McDonald, 2009. "Commonality in Codes of Ethics," Journal of Business Ethics, Springer, vol. 90(2), pages 129-139, November.
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    6. Hong, Harrison & Kacperczyk, Marcin, 2009. "The price of sin: The effects of social norms on markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 15-36, July.
    7. Kristi Yuthas & Rodney Rogers & Jesse F. Dillard, 2002. "Communicative Action and Corporate Annual Reports," Journal of Business Ethics, Springer, vol. 41(1), pages 141-157, November.
    8. Tim Loughran & Bill Mcdonald, 2011. "When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10‐Ks," Journal of Finance, American Finance Association, vol. 66(1), pages 35-65, February.
    9. Bill McEvily & Vincenzo Perrone & Akbar Zaheer, 2003. "Introduction to the Special Issue on Trust in an Organizational Context," Organization Science, INFORMS, vol. 14(1), pages 1-4, February.
    10. Lorenzo Patelli & Matteo Pedrini, 2015. "Is Tone at the Top Associated with Financial Reporting Aggressiveness?," Journal of Business Ethics, Springer, vol. 126(1), pages 3-19, January.
    11. Lori Holder-Webb & Jeffrey Cohen, 2012. "The Cut and Paste Society: Isomorphism in Codes of Ethics," Journal of Business Ethics, Springer, vol. 107(4), pages 485-509, June.
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    Cited by:

    1. Yu, Zhen & Xiao, Yao & Li, Jinpo, 2021. "Firm-level perception of uncertainty and innovation activity: Textual evidence from China's A-share market," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    2. Wolfgang Breuer & Andreas Knetsch & Astrid Juliane Salzmann, 2020. "What Does It Mean When Managers Talk About Trust?," Journal of Business Ethics, Springer, vol. 166(3), pages 473-488, October.
    3. Xu, Qiao & Fernando, Guy D. & Tam, Kinsun, 2019. "Trust and firm performance: A bi-directional study," Advances in accounting, Elsevier, vol. 47(C).
    4. Fotios Pasiouras & Elie Bouri & David Roubaud & Emilios Galariotis, 2021. "Culture and Multiple Firm–Bank Relationships: A Matter of Secrecy and Trust?," Journal of Business Ethics, Springer, vol. 174(1), pages 221-249, November.
    5. Kanagaretnam, Kiridaran & Mawani, Amin & Shi, Guifeng & Zhou, Zejiang, 2020. "Impact of social capital on tone ambiguity in banks’ 10-K filings," Journal of Behavioral and Experimental Finance, Elsevier, vol. 28(C).
    6. Avishek Bhandari & Joanna Golden & Kenton Walker & Joseph H. Zhang, 2022. "The relationship between stock repurchase completion rates, firm reputation and financial reporting quality: a commitment‐trust theory perspective," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2687-2724, June.
    7. Liu, Pu & Nguyen, Hazel T., 2020. "CEO characteristics and tone at the top inconsistency," Journal of Economics and Business, Elsevier, vol. 108(C).
    8. Barth, Andreas & Mansouri, Sasan, 2021. "Corporate culture and banking," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 46-75.
    9. Kladakis, George & Chen, Lei & Bellos, Sotirios K., 2023. "Ethical bank disclosures and liquidity creation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
    10. Graham, John R. & Grennan, Jillian & Harvey, Campbell R. & Rajgopal, Shivaram, 2022. "Corporate culture: Evidence from the field," Journal of Financial Economics, Elsevier, vol. 146(2), pages 552-593.
    11. Tim Loughran & Bill McDonald & James R. Otteson, 2023. "How Have Corporate Codes of Ethics Responded to an Era of Increased Scrutiny?," Journal of Business Ethics, Springer, vol. 183(4), pages 1029-1044, April.
    12. Hanen Khemakhem & Richard Fontaine & Nadia Smaili & Mahbub Zaman, 2023. "Whistleblowing regulations and the role of audit committees: insight from interviews," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 27(1), pages 131-151, March.
    13. Joseph J. Cabral & Chaoqun Deng & M. V. Shyam Kumar, 2020. "Internal Resource Allocation and External Alliance Activity of Diversified Firms," Journal of Management Studies, Wiley Blackwell, vol. 57(8), pages 1690-1717, December.
    14. Zhichao Zhang & Fangjun Wang, 2023. "Managerial short‐termism and financial statement comparability," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(5), pages 5027-5067, December.
    15. Jie He & Kam C. Chan, 2023. "Does short sales deregulation affect qualitative information disclosure?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S1), pages 1351-1380, April.
    16. Nina Shin & Jung-Sang Yoo & Ik-Whan G. Kwon, 2020. "Fostering Trust and Commitment in Complex Project Networks through Dedicated Investment in Partnership Management," Sustainability, MDPI, vol. 12(24), pages 1-21, December.
    17. He, Chao & Li, Yanxi & Zhu, Jiawei, 2022. "The effect of firm-level perception of uncertainty on innovation: Evidence from China’s listed firms," Economics Letters, Elsevier, vol. 221(C).
    18. Lenz, Guido & Mayer, Maximilian, 2023. "Hollywood, Wall Street, and Mistrusting Individual Investors," Journal of Economic Behavior & Organization, Elsevier, vol. 210(C), pages 117-138.

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